Worldwide Tax News
The Beijing National Tax Bureau has recently published the details of a major controlled foreign corporation (CFC) case involving CNY 300 million in undistributed profits of a Hong Kong subsidiary wholly owned by China resident enterprise.
Under China's general CFC rules, if a resident enterprise itself, or together with other Chinese residents, controls a foreign enterprise in a jurisdiction with a significantly lower effective tax rate (50% or less than China’s EIT rate, i.e. less than 12.5%) and that foreign enterprise does not distribute its profits or reduces distribution of its profits without reasonable operating needs, the profits must be attributable to the resident enterprise as revenue in the current tax year. Control is defined as:
- When the resident enterprise holds 10% or more of the voting shares of the foreign enterprise and collectively with other Chinese residents more than 50% of the shares of the foreign enterprise are held at any time during the tax year; or
- When the above shareholding thresholds are not met, but the enterprise has substantive control of the foreigner enterprise’s shareholding, funding, operations, purchases and sales, and similar aspects
For the purpose of the rules, the Chinese resident shareholders may include individuals, but at least one of the shareholders must be an enterprise.
An exemption from recognizing undistributed profits of a CFC as Chinese taxable income is provided if at least one of the following criteria is met:
- The CFC is established in a high-tax country, as designated by the China State Administration of Taxation;
- The CFC income is derived mainly from active business operations; or
- The CFC's annual pre-tax profit is less than CNY 5 million
In the case recently published, the Hong Kong subsidiary had derived a CNY 300 million gain in 2011 from the sale to a Dutch company of its 100% interest in a Hong Kong holding that held interests in three Chinese enterprises. No dividend was declared in the year of the gain.
In the following year, the Hong Kong subsidiary applied to the Chinese tax authorities to be treated as a Chinese resident enterprise based on the place of effective management rule. The reason the Hong Kong subsidiary wanted to be treated as a Chinese resident is because the distribution would then be tax free. Under China's Tax |P Law dividend income and other distributions with respect to direct equity interests received by a resident enterprise from another resident enterprise are tax exempt (excluding publicly traded/listed shares held for a period less than 12 months).
Following the application for corporate tax residence, the Chinese tax authorities launched an investigation into the Hong Kong subsidiaries undistributed profits. The tax authorities then determined that the subsidiary was a CFC of the Chinese resident enterprise because:
- The enterprise controlled the subsidiary;
- The income of the subsidiary was passive and there was no reasonable operating need not to distribute; and
- Although Hong Kong's standard corporate tax rate is not less than 50% of the Chinese rate, capital gains in Hong Kong are exempt
As a result, the application for corporate tax residence was denied and a tax adjustment for the Chinese enterprise was made based on the CNY 300 million undistributed gain of the Hong Kong CFC.
On 7 May 2015, India's upper house of parliament, Rajya Sabha, returned Finance Bill 2015 following its passage by the lower house of parliament, Lok Sabha, on 30 April 2015. This completes the approval process for most of the 2015-2016 Union Budget measures, which generally apply from 1 April 2015. The main measures are summarized as follows.
The determination of residence in India in a tax year is changed from having control and management of its affairs in India to having its place of effective management in India. For this purpose, place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are in substance made.
The residence test based on incorporation in India remains unchanged.
The surcharge on the income of domestic companies exceeding INR 10 million up to INR 100 million is increased from 5% to 7%, resulting in an effective tax rate of 33.063% including education cess. The surcharge on income exceeding INR 100 million is increased from 10% to 12%, resulting in an effective tax rate of 34.608% including education cess.
The education cess of 3% for all companies, and the surcharge of 2% on the income of foreign companies exceeding INR 10 million up to INR 100 million and 5% on income exceeding INR 100 million are unchanged.
The 2012 amendment to section 9 of the ITA which allow for the taxation of capital gains resulting from indirect transfers of Indian assets between foreign companies, including retroactive taxation, is revised. The revisions include that the taxation is limited to indirect transfers involving underlying tangible or intangible Indian assets with a value exceeding INR 100 million which represent at least 50% of the value of the foreign company or entity being transferred.
An exemption applies if in the 12 months prior to the transfer, the foreign transferor (along with its associated enterprises) has not held the right of management or control in the foreign company directly holding the Indian assets and has not held more than 5% of the voting power, share capital or interest in the direct holding company.
The conditions for exemption similarly apply for the transfer of an indirect holding company, where in the 12 month prior to the transfer the transferor has not held the right of management or control in the indirect holding company and has not held voting power, share capital or interest in the indirect holding that would entitle the transferor to the right of management or control in the direct holding company or greater than 5% of the total voting power voting power, share capital or interest in the direct holding company.
When the indirect transfer of Indian assets is deemed to be taxable in India, the capital gains will be taxed on a proportionate basis. In addition, the relevant Indian entity will be required to report the offshore indirect transfer. Failure to report will result in a penalty equal to 2% of the value of the transfer if it results in a change in the ownership structure or control of the Indian entity; otherwise the penalty is INR 500,000.
The withholding tax rate on royalties and fees for technical services (FTS) paid by an Indian resident to a nonresident is reduced from 25% to 10%.
Foreign institutional investors are exempted from the Minimum Alternate Tax (MAT) in relation to long-term capital gains from securities transactions and short-term gains if subject to securities transactions tax. In addition, income from royalties, interest and technical services fees earned by foreign companies is exempt from MAT if the normal tax rate on such income is lower than the MAT rate of 18.5%.
It is important to note that the Indian government reportedly intends to pursue MAT claims arising prior to 1 April 2015, and a MAT committee has been formed to develop methods to resolve disputes.
The ITA is amended to specifically include that the presence of a fund manager or investment advisor in India will not constitute a permanent establishment (PE) for an offshore fund with the condition that over 95% of the funds investors are nonresidents, and no single investor, including connected persons, holds more than 10% of the fund.
Pass-through status is made available for alternative investment funds (AIF) registered with the Securities and Exchange Board of India as Category I AIFs or Category II AIFs, including onshore venture capital, infrastructure, private equity and debt funds.
The1% wealth tax is abolished.
The current service tax of 12.36% including cess is increased to a consolidated rate of 14% as part of the upcoming transition to GST.
The excise duty on manufactured goods is increased from 12% to 12.5%.
There will be no changes in the base rates of individual income tax, but the 10% surcharge on individual income exceeding INR 10 million is increased to 12%.
The following summarizes other measures presented with the 2015-2016 Union Budget not implemented by the Finance Bill 2015.
Measures obligating beneficial owners or beneficiaries of foreign income and assets to file a return disclosing such income/assets are included in the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill 2015. Key aspects of the Bill include:
- Undisclosed foreign income or income from undisclosed foreign assets will no longer be taxed under the 1961 Income Tax Act, but will instead be taxed at a flat rate of 30% with no exemptions, deductions or offset of losses carried forward;
- Non-disclosure of foreign income and assets will result in a penalty of 300% of the tax due;
- Failure to file a return or filing a return that inadequately discloses foreign income/assets will result in a penalty of INR 1 million and imprisonment for up to 7 years;
- In the case of willful evasion the term of imprisonment is up to 10 years;
- A short-term compliance opportunity will be provided before the stricter penalties of the Bill enter into force allowing declaration of undisclosed income/assets which will be subject to the 30% tax plus an equal amount as a penalty
India's lower house of parliament, Lok Sabha, passed the Bill on 11 May 2015. As per normal procedures it now goes to the upper house of parliament, Rajya Sabha, although it doesn't require approval from the upper house and will be considered approved if not returned within 15 days.
The standard corporate tax rate excluding the surcharge and education cess will be reduced from 30% to 25% over 4 years beginning in the 2016-2017 tax year.
The country-wide goods and services tax (GST) regime is planned to be implemented from 1 April 2016.
The threshold for the Indian transfer pricing rules to apply for specified domestic transactions is planned to be increased from INR 50 million to INR 200 million from 1 April 2016.
The implementation of the general anti-avoidance rule (GAAR) introduced in 2012 will be delayed to 1 April 2017 in order to take into account changes resulting from the OECD Base Erosion and Profit Shifting (BEPS) Project.
Indonesia has introduced a tax amnesty program with effect from 29 April 2015. Under the program, both individuals and corporation that are not registered for tax will be allowed to do so without incurring interest or other penalty charges provided the past taxes due are paid.
The tax amnesty is available for one year.
A protocol to the 1997 income and capital tax treaty between Cyprus and South Africa was signed on 1 April 2015. The protocol is the first to amend the treaty, and includes the following amendments:
- The definition of a "resident of a Contracting State" under paragraph 1 of Article 4 (Resident) is replaced;
- Dividends will be subject to a 5% withholding tax if the beneficial owner is a company directly holding at least 10% of the paying company's capital, otherwise the rate will be 10% (dividends are exempt under the current treaty); and
- Article 26 (Exchange of Information) is replaced, bringing it in line with the OECD standard for information exchange
The protocol will enter into force after the ratification instruments are exchanged, and will apply from the date of the introduction in South Africa of the system of taxation at shareholder level of dividends declared.
The tax information exchange agreement between Monaco and the UK entered into force on 22 April 2015. The agreement was signed by Monaco on 23 December 2014 and by the United Kingdom on 22 October 2014. It is the first of its kind between the two countries.
The agreement applies for criminal tax matters from the date of its entry into force, and for all other matters for taxable periods beginning on or after that date.